BENGALURU (Reuters) – A revival in the Canadian economy may already be underway, according to a Reuters poll of economists, who were mostly confident a rate cut was not needed and so predicted monetary policy would remain unchanged this year.
FILE PHOTO: The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch/File Photo
Nearly 70%, or 27 of 39, economists who provided a year-end outlook expected the central bank to keep its key interest rate on hold at 1.75% this year, compared with just over half, or 16 of 31, in a poll taken before the previous meeting in early December.
All but one respondent in the latest poll expected rates to remain unchanged when the BoC meets on Jan. 22, in line with the futures market’s view.
Optimism among economists was partly driven by a trade agreement signed by China and the United States this week after an 18-month trade war and by the latest labour market data, which showed more jobs than expected were added in December.
“The BoC should be encouraged by the rebound in employment, remaining in a data-dependent mode and unlikely to cut rates in 2020,” noted Veronica Clark, an economist at Citi in a research report.
“The December rebound in jobs is an encouraging sign that early-Q4 weakness apparent in recent data releases is temporary.”
The Jan. 13-16 poll of over 40 economists predicted the economy would grow at an annual rate of 1.6% this quarter after expanding 0.8% last quarter.
It was expected to grow 1.7% every quarter after that until the second quarter of next year. More than 85% – 18 of 21 – respondents said the recent economic slowdown in Canada was temporary. A majority said the economy’s revival was already underway.
“We are still subject to the winds of what’s going on globally. If the global economy is able to hold up in the course of this year, we would likely to do the same,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“I wouldn’t expect particularly strong growth in Canada, but we should hang in there if the global economy does as well.”
The jobless rate was predicted to average 5.8% from next quarter through to mid-2021 — the forecast horizon – a touch below the 5.9% forecast in an October poll. It averaged 5.7% last quarter.
Inflation was expected to remain below the central bank’s target of around 2%, averaging 1.9% this year and next year.
That inflation outlook should keep the Bank of Canada on the sidelines this year, where it’s been since October 2018, even when the U.S. Federal Reserve and European Central Bank eased policy.
Nearly three-quarters of respondents, or 17 of 23, said the Canadian economy does not need an interest rate cut before the end of 2020. That is a shift from a survey last month where economists split almost evenly on whether a rate cut was needed.
“The economy would need to go through a severe unexpected negative shock to seriously consider policy rate cuts,” said Sebastien Lavoie, chief economist at Laurentian Bank.
“In the context of a muddling through economy, the bar remains high for the BoC to embark on a new round of easing or tightening.”
Reporting and polling by Mumal Rathore; editing by Larry King
Can Industrial Policy Save The American Economy? – Forbes
As the US continues struggling with Covid-19 and economic recovery, debate is growing about the revival of “industrial policy”—government -led efforts to favor certain industries over others, in contradiction to market fundamentalist approaches. An important new forum in the Boston Review takes on these issues and is well worth your attention. For our future prosperity, these issues are more important than just arguing about deficits and taxes. (Disclosure: I’ve coauthored a piece in the forum.)
In the battle over President Biden’s economic proposals, most commentary focuses on whether the price tag of over $3.5 trillion is too large. How much should be paid for? Which taxes should go up or down? Senator Joe Manchin (D-WV), the key Democratic vote for Senate passage of the Biden plan recently called it “the largest single spending bill in history with no regard to rising inflation, crippling debt or the inevitability of future crises.”
But there’s a second debate hidden behind these budget numbers—how and whether government should deliberately foster some industries and withdraw support from others. Although simple introductory economics textbooks say government intervention is always “second best” to markets, in the real world government is constantly favoring some industries over others.
So the debate is really about what type of industrial policy we are going to have, not whether it exists. The Review’s forum centers on an excellent piece by economist Marianna Mazzucato and colleagues—“Industrial Policy’s Comeback.” They flatly (and correctly) say “market fundamentalism has failed to improve economic and social conditions,” calling for “a mission-oriented approach to the economy that embraces an active role for government in spurring growth and innovation.”
Mazzucato is one of our best thinkers on the complex relationships between government and the private sector. Her 2013 landmark book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths showed how government investment undergirded the tech revolution, with Apple and other firms adapting technology developed and paid for by the government, often through military spending.
Economists have long known that industrial policy is central to modern economies. In 2008, Harvard’s Dani Rodrik asked readers to imagine “a set of policy interventions targeted on a loosely-defined set of market imperfections…implemented by bureaucrats…and overseen by politicians” while subject to “rent-seeking by powerful groups and lobbies.”
Yikes! Rodrik says those sound like good reasons that “governments should stay away from industrial policy.” But he then turns the tables, saying he’s not describing industrial policy. Rather, those complicated conditions hold for “long-standing areas of government intervention such as education, health, social insurance, and macroeconomic stabilization.” And no one thinks we should stop those policies just because they are complicated and sometimes contentious.
So complexity, political debate, attempts to capture benefits at the costs of general prosperity, and addressing critical problems possessing lots of uncertainty characterize all modern social and economic policy. Hence Mazzucato’s emphasis on developing clear “missions” for industrial policy, with government setting overall directions and goals while avoiding “excessively top-down planning by an overbearing state.”
There’s a lot of deep thinking and clear argument in the Boston Review forum, from a wide range of viewpoints, and I won’t try to summarize it all here. Read the forum (and buy the new book the Review is publishing on this topic.)
My contribution to the forum, co-authored with my colleague (and spouse) Teresa Ghilarducci, emphasizes the central role workers and labor unions must play in any successful industrial policy. We hearken back to the great economist John Kenneth Galbraith, who after World War II focused on how the large firms needed to foster innovation and growth could be kept from purely self-interested behavior.
Galbraith’s answer was in the title of his 1952 book—American Capitalism: The Concept of Countervailing Power. Without government and union countervailing power, “private decisions could and presumably would lead to the unhampered exploitation of the public.”
Ghilarducci and I argue that successful industrial policy “promotes unionization and shared economic returns,” not just technical innovation where the gains are captured by a narrow slice of wealthy tech and finance owners. And the politics of industrial policy mean it won’t be enacted without union and popular support.
So as you follow the twists and turns of Biden’s economic plan, where the cable news and commentary are dominated by spending, taxes, and deficits, spare a thought for what that money will be spent on. Senator Manchin correctly warns about “the inevitability of future crises,” but those aren’t mainly budgetary issues. They are structural problems that need industrial policy solutions.
Our economy faces a short and long-term crisis of innovation, climate change, and racial, gender, and economic inequality. Industrial policy is critical to building a long-term, sustainable, and equitable prosperity. I commend the Boston Review forum and book to you as a way to understand this critical issue.
Germany's next leader could make or break the economy – CNBC
With Chancellor Angela Merkel due to leave office after Germany’s upcoming federal election on Sunday, the country’s priorities could change dramatically, particularly as power could soon be shared among newer (and more unpredictable) political forces.
It’s practically certain that the next government (like the current one) will be a coalition, but what’s far less certain is which parties will create or dominate a governing alliance.
What form the next coalition takes will undoubtedly have a big impact on Germany’s economy which is Europe’s largest and, arguably, its most important.
In 2019, almost a quarter of the EU’s gross domestic product (24.7%) was generated by Germany, according to Eurostat, and so how the country is governed — at a time of transition in terms of global trade and consumer trends — matters.
The election is still wide open with the latest voter poll on Monday showing that while the left-leaning Social Democratic Party remains in the lead and is seen with 25% of the vote, the ruling conservative alliance of the CDU-CSU (the Christian Democratic Union and Christian Social Union) has closed the gap, and currently stands to gain 22% of the vote. The Green Party, meanwhile, trails with 15% of the vote, according to the Insa poll for the Bild newspaper.
A new coalition will have to be formed after the vote and German economists say certain alliances could have “massive consequences” on the country’s economy.
Germany’s respected Ifo Institute and newspaper Frankfurter Allgemeine Zeitung surveyed 153 economists at German universities, asking them how different coalition formations could affect Germany’s economic growth, unemployment, public debt, and income inequality.
For each of these measures, respondents were asked under which coalition the highest and lowest levels could be expected at the end of the next legislative period.
The survey results, published Tuesday, found that 83% of the German economists polled believed that the lowest economic growth rate would be the product of a so-called “Red/Red/Green” coalition of the SPD, the Left Party (Die Linke) and the Greens.
Such a coalition of leftist parties “would represent a sea change in policy direction, which would translate into a different economic policy with higher taxes and more government transfers,” Ifo Researcher and Professor Niklas Potrafke noted of the survey results Tuesday, adding “that would also have massive consequences for the real economy.”
A total of 77% of the economists said they expected that, in addition to delivering the lowest economic growth, a “Red/Red/Green” coalition would lead to the highest unemployment rate and 86% believed they would have the highest national debt. However, 55% of the economists also believe that such a leftist alliance would achieve the greatest net reduction in income inequality.
The devil you know
Perhaps unsurprisingly, 44% of the economists believed that a coalition of the ruling CDU-CSU alliance and the pro-business FDP (a “Black/Yellow” coalition) would achieve the highest growth rate for Germany, although this grouping lacks a majority when it comes to current polls.
A “Black/Yellow” coalition would achieve the lowest unemployment rate, according to 43%, and the lowest public debt ratio, according to 73% of the economists.
This prosperity could come at a price to many with 70% of economists believing that such a coalition would lead to the highest net income inequality and 56% seeing it as leading to the highest carbon emissions of all the alliances.
In joint second place, 18% of the economists believed that the highest economic growth could come out of a coalition of the SPD, Greens, and FDP (widely called a “traffic light” coalition) and 18% felt the same about an alliance of the CDU-CSU, Greens, and FDP (known as a “Jamaica” coalition).
“Should either a so-called traffic light or a Jamaica coalition be formed, respondents believe the effects on growth, inequality, the public debt ratio, the unemployment rate, and carbon emissions would be more restrained,” Potrafke noted.
Polls wide open
Currently, there are a variety of possible coalition options, with most facing stumbling blocks to formation, meaning that there are likely to be protracted negotiations after the election due to policy differences between the parties in areas ranging from economics to climate targets.
“Coalition formation might take some time,” macro analysts from Teneo Intelligence said in a note Monday.
“Less than one week ahead of the 26 September federal election, the Social Democrats continue to lead in the polls. However, the Christian alliance appears to have recovered some ground. But even if the SPD wins, this does not necessarily mean that Finance Minister Olaf Scholz will become the next chancellor; CDU/CSU candidate Armin Laschet could still try to outmaneuver Scholz, for instance by trying to form an alternative government with the Greens and the center-right Liberals (the FDP).”
The CDU-CSU is used to being in power, but that could all change after next Sunday’s vote; both the SPD and Greens’ candidates for chancellor, Olaf Scholz and Annalena Baerbock, have suggested that neither of them has much appetite for a coalition with the CDU-CSU.
“I think that, after 16 years, many voters would like for the CDU to finally go into opposition again,” Scholz said during the last TV debate between the main contenders for the chancellery on Sunday.
Canadian dollar, TSX slide ahead of uncertain election outcome
The Canadian dollar fell to a one-month low against its U.S. counterpart on Monday and the Toronto stock market posted its biggest decline since January as Canadians headed to the polls and worries about China roiled global financial markets.
The loonie was trading 0.3% lower at 1.2810 to the greenback, or 78.06 U.S. cents, after touching its weakest intraday level since Aug. 20 at 1.2895.
Prime Minister Justin Trudeau may cling to power after the dust has settled from Monday’s election, but he is likely to lose his bid for a parliamentary majority.
Foreign investors have worried that the election could result in a deadlock that hampers Ottawa’s response to the COVID-19 pandemic and further slows the economic recovery from the crisis.
“No matter the result of the Canadian election, the winner may soon have to face the prospect of a sharp slowdown in China,” said Adam Button, chief currency analyst at ForexLive.
World stocks skidded and oil, one of Canada‘s major exports, settled 2.3% lower, as troubles at property group China Evergrande sparked concerns about spillover risks to the economy.
“It’s a very confusing time and that’s impacting the marketplace,” said Irwin Michael, portfolio manager at ABC Funds in Toronto.
Investors in equities are casting a nervous eye over some of the campaign promises made by Canadian political parties, including Trudeau’s vow to raise corporate taxes on the most profitable banks and insurers.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 335.82 points, or 1.6%, at 20,154.54, its lowest closing level since July 22.
Financials, which account for about 30% of the TSX’s valuation, fell 1.8%, while energy was down 2.8%.
Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year fell 6.6 basis points to 1.216%.
(Reporting by Fergal Smith; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Sagarika Jaisinghani and Medha Singh in Bengaluru; Editing by Peter Cooney)
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